Nongfu Spring： Revenue is increasing steadily, explosive products are hard to find

Text | Liu Kuang

"Nongfu Spring is a little sweet." This advertising slogan left a deep impression on the public and made Nongfu Spring a household name in the water drink brand. Tracing the history of the brand, Nongfu Spring opened up the water drink market with its own differentiated marketing strategy, competing with long-established water drink brands such as Wahaha and Master Kong, and even maintained the first market share of packaged drinking water in China for eight consecutive years from 2012 to 2019.

With the upgrading of consumption and the improvement of economic level, the consumption field is constantly changing, and the water drinking track is constantly subdivided. As an old player in the industry, Nongfu Spring is not easy. But the recently released semi-annual report seems to let us see the huge potential of Nongfu Spring.

revenue and net profit double growth

On August 25, Nongfu Spring released its 2021 semi-annual report. According to the financial report data, Nongfu Spring’s revenue in the first half of the year was 15.17 billion yuan, an increase of 31.4% year-on-year; net profit was 4.013 billion yuan, an increase of 40.1% year-on-year. It can be seen through the financial report data that Nongfu Spring’s revenue and net profit achieved double growth in the first half of this year.

From the product point of view, Nongfu Spring multiple product lines to help revenue. According to the financial report, Nongfu Spring packaged drinking water revenue 8.119 billion yuan, an increase of 25.6% year-on-year, accounting for 58.8%; tea beverage revenue 2.182 billion yuan, an increase of 36.4%, accounting for 14.4%; functional beverage revenue 2.004 billion yuan, an increase of 38.4%, accounting for 13.2%; fruit juice beverage revenue 1.224 billion yuan, an increase of 29.9%, accounting for 8.1%; other categories (including coffee drinks, soda water, plant yogurt, gas-flavored drinks) total revenue 846 million yuan, an increase of 86.8%, accounting for 5.5%.

From the gross profit margin, Nongfu Spring gross profit margin continued to grow. According to the financial report, Nongfu Spring gross profit in the first half of the year was 9.241 billion yuan, an increase of 33.7% over the same period last year, and gross profit margin also increased by 1% to 60.9%. Master Kong and Unified are the top players in the water market, and gross profit margin only fluctuated around 30%. Nongfu Spring’s high gross profit margin promoted double income in the first half of the year.

From the cost of sales, Nongfu Spring relaxed cost control. According to the financial report, the cost of sales of Nongfu Spring in the first half of the year was 5.934 billion yuan, an increase of 28% year-on-year. Among them, sales and distribution expenses were 3.554 billion yuan, an increase of 31.92% year-on-year, accounting for 23.4% of revenue; other expenses were 55.757 million yuan, an increase of 1186.5% year-on-year, accounting for 0.4% of revenue.

In the first half of the year, Nongfu Spring’s product sales volume, gross profit margin, and sales cost all increased. It is not difficult to see that Nongfu Spring has increased its investment in sales costs to enhance profitability, and has taken improving product sales volume and gross profit margin as a breakthrough point, thus boosting both revenue and net profit growth.

Track exploration of double growth

For enterprises, whether it is revenue growth or net profit growth, there are traces to follow, and Nongfu Spring’s double growth is no exception. Nongfu Spring showed in its financial report that this is due to the increase in the company’s product sales, changes in product structure, and effective control of PET costs.

First of all, the consumption environment has improved, and the sales of Nongfu Spring have begun to recover. According to the financial report, due to the stable epidemic prevention and control in the first half of the year, the national economy has gradually recovered, the overall market sales have improved, and the beverage industry has been further developed. According to the preliminary accounting data of the National Bureau of Statistics, the retail sales of beverage consumer goods in the first half of the year were 135.40 billion yuan, an increase of 29.2% year-on-year. With the improvement of the market environment, the sales of various categories of Nongfu Spring have also gradually recovered.

Secondly, Nongfu Spring continues to launch new products to enrich product types. In terms of packaged water, it has launched high-margin new products such as "Changbai Snow" and "Wuyi Mountain Tea Water". In other sub-segments of water and beverage business, Oriental Leaf has launched two new flavors: "Green Orange Pu’er" and "Xuan Rice Tea"; Screaming has launched a new "isotonic" series; soda water has launched four types of sparkling water: Dawn White Peach, Mojito, Hyuga Summer Orange and Chunjian Oil Orange. The launch of various series of new products can better seize the water and beverage market.

Finally, Nongfu Spring’s PET costs in the first half of 2021 are lower. PET, or polyester resin, is obtained through petroleum cracking and is the main raw material for the production of product bottles. In 2020, the international crude oil price fell, and the price of PET fell together. Its prospectus said: "We have seized the opportunity to purchase PET to reduce the cost of raw materials." Nongfu Spring has stored enough PET to reduce the cost of raw materials. As the cost of PET has fallen, Nongfu Spring’s gross margin has also increased.

The double growth results achieved by Nongfu Spring in the first half of the year were not only affected by the improvement of the domestic consumer industry, but also benefited from its own forward-looking. The dual reasons together helped Nongfu Spring achieve revenue and net profit growth.

There are still concerns after double growth

The water drinking track has entered the most lively time, new and old players are struggling to seize the market, and getting consumer recognition has become the core of the current competition. Nongfu Spring has achieved double growth in the first half of the year, can it maintain its record in the second half, keep up with the pace of the team, and not be kicked out?

First, a peach triggered a marketing crisis for Nongfu Spring. "The flavor of white peaches at dawn, white peaches at dawn are produced in Fukushima Prefecture, Japan." Anyone who reads the sentence will think that the raw materials are from Fukushima, Japan, but Nongfu Spring’s public relations department has a "new explanation". The official response is difficult for the public to be angry, but it has instead put the brand in the awkward situation of "real Fukushima or fake marketing".

Although the marketing overturn was not reflected in the financial report released this time, it was reflected in the capital markets. In the three trading days after the public response of Nongfu Spring, the share price of Nongfu Spring fell one after another, falling by 1.58%, 2.72% and 0.89% respectively, and the share price fell below 39 Hong Kong dollars per share.

Secondly, the offline channel encountered challenges. Yuan Qi Sen Lin captured a group of consumers with his sparkling water, and also adopted the traditional "freezer war" in the lower-tier market, which caused the freezers placed by Nongfu Spring, Master Kong and other brands to be returned by merchants. In order to snipe Yuan Qi Sen Lin’s freezer placement plan, Nongfu Spring launched the "God of Wealth" activity nationwide in an attempt to stabilize offline sales.

Finally, new products appear frequently, but there are no explosions. In recent years, Nongfu Spring has continuously expanded its layout in the water drinking track, and each sub-track has launched products. Although the category update speed is fast, it lacks bright spots. Since the launch of Tea Pi in 2016, there has been no popular drink, making it difficult to seize the market.

Even if Nongfu Spring has achieved the current double growth, it is not safe to rest easy. Nongfu Spring is encountering a marketing crisis while being robbed of sales channels by new players. At the same time, it is also facing the problem of having new products without explosions. Industry giants are also slightly tired when encountering menacing opponents, and the situation is not optimistic.

There are constantly new categories flooding into the water drinking track, and the competition is extremely fierce. Judging from the past situation, no brand can sit at the top. Blindly re-engraving the trend period of dividend products without seeking innovation, not only can not bring new experiences to consumers, but also make consumers taste fatigue, and in the long run the brand will lack competitiveness.

Nongfu Spring has built a moat of natural concepts, has a broad consumer market, and has laid mature sales channels. It has obvious advantages and strong ability to face risks. In the face of the impact of new brands, it is better to use static braking and continue to develop new products on the basis of solid foundation. Catering to the current new consumption trend, challenging consumers’ taste buds, and starting to build its own products into "Everred Products" to achieve the next double growth.